Should I choose a fixed, tracker or variable rate mortgage?

Should I choose a fixed, tracker or variable rate mortgage?

By Matilda Battersby

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Looking to get your first mortgage or lock in a new one? Let's take a look at the pros and cons of the different types of mortgages available.

Mortgages aren't top of most people's dinner party conversation hit list.

But home loans are a big deal, and doing your homework on them is essential.

The right one shouldn't take up too much of your monthly income. After all, we all need spare cash for the fun things in life too.

To make sure you get a deal you can afford, let's take a look at the different options available.

What are the differences between fixed, tracker and variable rate mortgages?

The majority of repayment mortgages, where the loan is gradually paid off over the mortgage term, are either on a fixed-rate, tracker or standard variable rate.

So what are the differences between them?

Fixed rate mortgages

A fixed rate mortgage is where the interest you pay on your loan each month is fixed to a specific percentage for a length of time.

That means you'll know exactly how much you'll be spending on the mortgage each month for a fixed number of years.

Fixed rate deals can last for two, three, five or even 10 years. 

See the latest fixed rate mortgages.

Pros of a fixCons of a fix
Certainty – it gives you peace of mind that your monthly payments won’t changeYou lose on interest savings – if rates fall, you'll be paying more than you would do with a tracker
Easier to budget – it’s easier to manage your outgoingsThey can be more expensive – starting rates on fixed mortgages can be more expensive than those on trackers
If interest rates rise, you could make a saving. And there are plenty of good fixed rate deals up for grabsYou could face a hefty early repayment charge if you want to pay off a fixed-rate loan before the end of the agreed term

Tracker mortgages

A tracker mortgage is where the interest you pay on what you borrow tracks the interest rate set by the Bank of England, otherwise known as the Bank of England base rate.

Tracker mortgages don't match the interest rate, but they track it, moving in line with it.

So if your tracker deal was priced at 1% above the base rate, and the base rate moved from 0.25% to 0.5%, your mortgage rate would increase from 1.25% to 1.5%.

Tracker deals tend to be especially popular when interest rates are low or falling.

They usually have an introductory deal period that lasts between two, five or 10 years. After that, you'd move onto the mortgage provider's standard variable rate.

That said, it is possible, though rare, to get a ‘lifetime tracker’ mortgage.

Lifetime trackers track the base rate for the whole life of the loan, which could be up to 25 or 30 years.

The advantage of a tracker mortgage is that you might pay less if the interest rate goes down.

Compare the latest tracker mortgages.

Pros of a trackerCons of a tracker
Low rates – rates on the ‘best buy’ trackers can start off lower than those on the top fixed ratesMore uncertainty – you don’t get the peace of mind that you do with a fix. Your monthly repayments could rise at any time
Transparency – you know your mortgage rate will only move in line with the base rate (it can’t be moved by the lender independently)Costs can go up – if rates go up, your monthly mortgage repayments will also rise. Consider how much you can afford to pay each month and if the risk is worth it
Cheaper fees – arrangement fees for tracker mortgages can be lower than those attached to fixed-rate deals. Sometimes trackers are completely fee-freeEarly repayment penalties – as with fixed rates, you'll usually be charged an early repayment charge (ERC) if you want to get out early. Some trackers don't carry ERCs, so make sure you read up on the deal

Standard variable rate mortgages

The standard variable rate is what your mortgage reverts to when the deal expires.

Standard variable rate mortgages are usually more expensive, but have greater flexibility if you want to remortgage or move in the short term.

The average standard variable rate mortgage is usually a couple of percentage points higher than the best available mortgage rates.

The good news is, if interest rates go down, you'll pay less. But the bad news is if they go up, you'll pay more.

Once you enter the standard variable rate, it’s usually time to look for a better deal. 

But there can be advantages and disadvantages to sticking with one in the short-term.

Compare standard variable rate mortgages.

Pros of a standard variableCons of a standard variable
Flexibility - nothing is locking you in. You can remortgage or pay the whole loan back at any time without any early repayment chargesMore expensive - they are usually the most expensive types of mortgage, so you may end up paying more than you need to
If interest rates go down, chances are your lender’s standard variable rate will follow. That means your payments could get cheaperMore uncertainty - your lender could increase their rates at any time, but they usually change them in line with the Bank of England base rate
No or low fees - your fixed-rate or tracker becomes a standard variable without you being charged an arrangement fee. And, if you’re taking out a new loan, a standard variable will usually have a cheaper arrangement feeGreater risk for bigger expense -  these types of mortgages are more unpredictable than tracker deals. Because of this they’re seen as riskier, especially in a low interest rate environment where tracker deals are cheap

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What type of mortgage is best for you?

Choosing whether to fix your mortgage or go for a tracker or variable rate is a difficult call to make. You’re effectively betting on the future movement of interest rates.

That’s why your decision should come down to your personal circumstances. 

If you’re worried about the prospect of rates rising, the security of a fix might be best.

Just make sure you think carefully about how long you want to fix for. Getting out of fixed deals can be very expensive.

If it’s flexibility you need, for example if you're planning to move home within a year or two, it might be best to go for a short-term fixed or tracker rate option.

And if you’re anticipating lots of change, like the arrival of a new baby or a new job, you might prefer the flexibility of the standard variable rate for a short while.

Expecting to move soon?

Most mortgages are portable, allowing you to take them with you to your new home, otherwise known as ‘porting’. But not all of them do, so be sure to check.

Compare mortgage deals

Once you've decided which one to go for, make sure you do your research and compare the best deals in each camp.

You’ll need to work out which ones really work out the cheapest. Some of the lowest mortgage rates advertised come with the highest set-up fees.

That's where a mortgage broker can be very useful.